How to calculate Retirement corpus

How to calculate Retirement Corpus:

Retirement planning is one financial aspect that we often tend to miss out on while planning our finances. However, if you do not plan your finances well beforehand, there can be difficulties post-retirement when you might not have a regular source of income.

Calculation of retirement corpus:

• How many years left for retirement and expected post retirement life
• Evaluate inflation-adjusted returns (post retirement)
• Find out post retirement living expenses
• Calculate current living expenses and take inflation into consideration

1. Assume 80%  of above expenses at retirement  (reasoning is expenses not needed at retirement such as Children education , EMI ( if living in own house) , lower transport fuel charges and lifestyle changes , increase medical expenses)

• Calculate Retirement corpus (taking into account post retirement living expenses , inflation adjusted return over post retirement life)
• Deduce monthly/yearly savings required to generate required retirement corpus.

For Illustration:

1. Calculate Years for Retirement (20) . Current age = 40 , Retirement age = 60
2. Calculate post retirement life (20) . Life expectancy =80 , Retirement age=60
3. Calculation of inflation adjusted return: ((1+ Interest)/(1+Inflation Rate))*100

Post-Retirement Inflation Adjusted Return = ((1+8%)/ (1+6%)) -1= 1.9%

4. Calculate retirement expenses at 60 years ( we can assume 80% of current expenses adjusted with inflation ) = Rs.2565708

Current expenses : Rs.1000000 , at retirement : Rs.800000 ,Inflation : 6%

(800000*(1+6%)^(20) = Rs.2565708

5. Calculation of Retirement Corpus: Using Present Value function (PV) in financial excel ; RATE= 1.9% , NPER(years) =20 , PMT (retirement expenses@60 =Rs.2565708 .

= PV(Rate, NPER, PMT,FV,,) = PV(1.9%,20,-2565708,,1)

Calculate “PV(Present Value)’ function (assuming payment made each year to be Rs. 2565708; at the rate of inflation adjusted return of 1.9%, over post retirement years of 20 years.) Retirement corpus required will be Rs. 43215255. (Rs.4.3 crores)